MACRO
Consumption, C Investment, I Government spending, G In the total demand for goods, consumption is assumed to be primarily determined by disposable income .
N X X
Which of the following individuals would be considered unemployed? In the short run, a reduction in the price of oil will cause
None of the above a reduction in the inflation rate.
If all the exogenous variables in the IS relation, such as taxes and government spending, are constant, then an increase in the interest rate will
decrease output
Investment is
positively related to the level of sales and negatively related to the interest rate
The decline in U.S. housing prices starting in 2006 was amplified into a major financial crisis as a result of several contributory factors.
the increased reliance by banks on wholesale funding. the spread of securitization. banks becoming highly leveraged.
What happens to inflation when theta = 1 and unemployment is kept at the natural rate of unemployment?
. The inflation rate stays constant from one year to the next.
A decrease in the expected price will result in a decrease in prices.
Given what you found above, you can see that expected inflation can impact actual inflation through its effects on _______. nominal wages, W
For a given nominal interest rate, a reduction in expected inflation will cause:
an increase in the real interest rate
When the interest rate increases, all of the following take place except
the price of bonds increases.
The demand for central bank money consists of the demand for
(A and c only) Currency by people, reserves by banks
Nominal and real interest rates around the world There are a few episodes. of negative nominal interest rates around the world. Some may or may not be in play as you read this book. The Swiss nominal policy rate, the Swiss equivalent of the federal funds rate, was negative in 2014 and 2015. If so, why not hold cash instead of bonds? A negative value for the real interest rate arises when the rate of price inflation Nominal interest rates differ from real interest rates in that nominal interest rates are expressed in terms of dollars .
All of the above are plausible. exceeds the nominal rate of interest.
What does the graph tell us about the impact of a permanent increase in the price of oil on the natural rate of unemployment and real wages?
The natural rate will increase and real wages will decrease
The immediate effects of the financial crisis on the macroeconomy included
a dramatic decline in confidence. limited access to credit for many borrowers, especially small firms. sharply higher borrowing rates for consumers and firms.
For the multiplier to be positive, what condition must (c1 + b1) satisfy? A government's use of fiscal policy to promote a desirable level or growth rate of output is A government seeking to decrease output through the use of fiscal policy may consider
c1 + b1 < 1 complicated by a variety of factors raising taxes and/or decreasing government spending.
Income is a _______ variable, and financial wealth is a _______ variable. The term investment, as used by economists, refers to the ___________.
flow; stock. purchase of new plants and equipment by firms and the purchase of new houses by households.
The price setting relation is
horizontal.
Which of the following is true about the effect of an increase in government spending? An increase in government spending
increases output
might increase in this way because What happens to inflation when theta = 1 and unemployment is kept below the natural rate of unemployment?
inflation expectations adapt to persistently positive inflation. There will be an increasing inflation rate.
This expectations structure is probably not realistic because it implies that
inflation expectations are always wrong.
For an equilibrium condition to occur in the goods market When government spending increases by $100, equilibrium output in the short run is expected to
output must equal consumption, investment, government spending, and net exports. increase by more than $100.
The demand for money in the economy depends on the Which of the following statements correctly describes the relationship between the interest rate and money demand?
rate of interest. level of overall transactions. When the interest rate increases, money demand decreases because interest-paying bonds become more attractive than the money balance.
Which of the following factors determines the risk premium that bond holders require to hold bonds? If at the same time, the risk aversion of bond holders falls, the risk premium on the issuer's bonds becomes smaller
Borrowers' probability of default. Bond holders' degree of risk aversion.
If the central bank wants to increase the money supply, it can
buy bonds in the market for bonds.
If the central bank wants to increase the money supply, it can The Federal Reserve can The demand for money curve shown in the accompanying figure becomes horizontal when the interest rate falls to zero because
buy bonds in the market for bonds. determine the federal funds rate by changing the supply of central bank money people become indifferent between holding money and holding bonds at zero percent.
Consider the following simplified production function: Upper Y equals Upper N , where Upper Y is output and Upper N is employment. According to the production function, labor's productivity (output per worker) is Given the value of labor's productivity in the simplified production function, Upper Y equals Upper N , it follows that the cost of one more unit of output (that is, the marginal cost) is equal to the cost of employing one more worker, at wage Upper W . If the goods market is not perfectly competitive, then Upper P greater than Upper W .
constant and equal to 1.
The Federal Reserve can When government spending decreases, Whenever the expected inflation rate is positive: If the price of the bond increases, the rate of interest
determine the federal funds rate by changing the supply of central bank money investment falls due to a reduction in output. none of the above always decreases.
As the interest rate falls The downward-sloping curve is the IS curve, and at any point on this curve, we know that the goods market is in equilibrium. The horizontal line is the LM curve, and at any point on this curve, we know that the financial market is in equilibrium. At point Upper A in the figure, both the markets you identified above are in equilibrium, so this point (Upper Y , font size increased by 1 font size increased by 1 i overbar) defines the economy's overall equilibrium. Government policy can increase output without changing the interest rate when
equilibrium investment may increase, decrease, or remain unchanged. If the output level associated with this point corresponds to an unacceptably high inflation rate, the government may pursue a fiscal policy that is contractionary . The specific tax and spending actions of this policy would decrease the budget deficit. an expansionary fiscal policy is used.
The IS curve is downward sloping because equilibrium in the The LM curve is horizontal because equilibrium in Given the approach taken by central banks in recent years, the appropriate characterization is that monetary policy entails the choice of the interest rate The assumption underlying this curve is that the central bank chooses the interest rate , then adjusts the money stock to achieve it.
goods market implies that interest rate and output are inversely related financial markets implies that as output increases, the central bank adjusts the money supply to maintain its interest rate target.
From these demand functions, one can conclude that if this person's income increases but her wealth remains unchanged The money supply line is vertical to indicate that the amount of money in circulation is independent of the interest rate. The demand for money If the price of bonds increases, the interest rate ____________.
her demand for money increases but her demand for bonds decreases. As a result of the increase in the interest rate from 5 to 9%, the Federal Reserve's balance sheet contracts in terms of the assets and liabilities it holds. depends negatively on the interest rate. will fall
The real interest rate is equal to the nominal interest rate How would you change the formula in this case?
minus the inflation rate. The final term would become p "times" some fraction of left parenthesis 1 plus i plus x right parenthesis.
A government seeking to decrease output through the use of fiscal policy may consider
. raising taxes and/or decreasing government spending
Using the government spending multiplier and the tax multiplier (which forms the balanced budget multiplier), what is the change in equilibrium GDP? Balanced budget changes in G and T are macroeconomically neutral. How does the specific value of the propensity to consume affect the size of the balanced budget multiplier? A government seeking to increase output through the use of fiscal policy may consider
1 False The size of the propensity to consume has no impact on the balanced budget multiplier. reducing taxes and/or increasing government spending.
Which of the following accurately describes the relationship between an economy's production of goods and services, its sales of goods and services, and its inventory investment? In any given year, inventory investment Fiscal policy refers to the An increase in the propensity to consume will ___________.
All of the above is typically small and may be positive, negative, or zero government's decisions on the uses of government spending and taxes. all of the above.
Which of the following accurately describes the relationship between an economy's production of goods and services, its sales of goods and services, and its inventory investment? In any given year, inventory investment Fiscal policy refers to the
All of the above is typically small and may be positive, negative, or zero. government's decisions on the uses of government spending and taxes.
It will be hard for firms to find workers to hire, and it will be easy for workers to find jobs. Thus, workers will have relatively more bargaining power than firms .
As the unemployment rate gets low, the wage will increase . Thus, if the unemployment rate were ever to approach zero, the wage rate would become extremely high, discouraging further hiring .
Equilibrium in the goods market requires that production Y be equal to the demand for goods Equilibrium in the goods market can be expressed as Production = Demand. Alternatively, it can be stated as . Decisions regarding investment are made by __________, whereas decisions regarding saving are made by How does the relation between investment and output affect the value of the multiplier?
At the intersection point A, we know that the production of goods is equal to the demand for goods. Investment = Saving. firms; consumers and the government All of the above.
Which of the following are implications of the equation you identified above? (Check all that apply.)
Because expected inflation is typically positive, the real interest rate is typically lower than the nominal interest rate. Your answer is correct.C. The expected rate of inflation can be discerned by examining the difference between the nominal interest rate and the real interest rate. Your answer is correct.D. When expected inflation equals zero, the nominal interest rate and the real interest rate are equal
For the last 25 years Europe has had a higher average unemployment rate than the United States. Given that Europe has not experienced any sustained decrease in inflation over that period, what is the most likely explanation for this difference? What are some of the possible causes for Europe's high average unemployment rate? (Check all that apply.) The average unemployment rate in the United States in the 1980s was around 7.3 %, in the 1990s the average rate was around 5.8 %, and the average rate for the early 2000s was around 5.0 %.
Europe has a higher natural rate of unemployment than the United States generous system of unemployment benefits This is the correct answer.B. Bargaining rules that strengthen unions High levels of employment protection
If government spending and taxes increase by equal amounts, then the n the IS-LM model, investment spending is specified as The upward slope of curve ZZ is attributable to The IS curve displayed in the figure on the right indicates that a decrease in the rate of interest results in an increase in output through the multiplier effect.
IS curve will shift to the right. a positive function of output and a negative function of the interest rate A and B only.
During the recent recession, several European countries proposed austerity measures that would help shrink the size of the national deficits within the countries. These proposed measures included tax hikes and cuts in government spending. When this happened in the United States in the 1990s, there was an accompanying decrease in the policy rate to help avoid slowing the economy down too much. Why was this same policy decision more difficult in Europe?
In response to the recession, the policy rate in Europe had already been lowered close to the zero lower bound, so additional decreases were not viable.
Which of the following best describes the relationship between workers' actual wages and their reservation wages? The prices that firms set are a function of the costs they incur, and these costs, in turn, depend on A simplified production function showing output (Upper Y ) as a function of employment (Upper N ) and labor productivity (Upper A ) can be written as
Most workers are typically paid a wage that is greater than their reservation wage. the prices of inputs the nature of the production function Y= A x N
If the money supply intersects the horizontal portion of the money demand, expansionary monetary policy no longer works, and the economy is said to be stuck in a liquidity trap. comparing the pattern of cash withdrawals, we can conclude that ATMs and credit cards have If the firm faces higher interest rates
The demand for money curve shown in the accompanying figure reflects a constraint on the interest rate known as the zero lower bound reduced the demand for money bonds will become more attractive financial assets, so firms are more likely to purchase bonds rather than to finance investment projects.
Which of the following is not an action taken by governments to help stabilize the financial sector? The American Recovery and Reinvestment Ac
The government created additional tax cuts. All of the Above
The downward-sloping curve is the IS curve, and at any point on this curve, we know that the goods market is in equilibrium.
The horizontal line is the LM curve, and at any point on this curve, we know that the financial market is in equilibrium. At point Upper A in the figure, both the markets you identified above are in equilibrium, so this point (Upper Y , font size increased by 1 font size increased by 1 i overbar) defines the economy's overall equilibrium.
Which of the following statements about the reservation wage is correct? Efficiency wage theory would predict that relative to the wage of your first job, the job you will have in 10 years will pay If this change were made permanent, it would be expected that reservation wages would increase .
The wage that you were paid for your first job most likely was greater than your reservation wage. more, because firms will want to pay more to increase morale and productivity and reduce turnover.
What happens to inflation when theta = 1 and unemployment is kept below the natural rate of unemployment? What happens to inflation when theta = 1 and unemployment is kept at the natural rate of unemployment? In the late 1960s, the economists Milton Friedman and Edmund Phelps said
There will be an increasing inflation rate. The inflation rate stays constant from one year to the next. that the inflation-unemployment tradeoff could not be sustained below the natural rate of unemployment.
In the IS-LM framework, the ________ interest rate directly reflects central bank actions, while the ________ rate is taken as the relevant rate for consumers and firms. If investors become more risk averse and/or more concerned about the health of the financial system, consumers and firms are likely to see a rise in the rate they pay to obtain funds.
policy; borrowing If the central bank wants to maintain the economy's output at its initial level, the change cited above will require expansionary monetary policy.
The demand for money in the economy depends on the (Check all that apply.) If the price of the bond increases, the rate of interest ____________.
rate of interest. level of overall transactions. A. always decreases.
An econometric study of the dynamics of monetary policy using U.S. data covering three decades indicates that
the IS-LM model accurately captures the short-run behavior of the economy in response to these policies.
The labor force is defined as: The wage setting relation is For this question, assume that the Phillips curve equation is represented by the following equation: pit minus pit-1 = (m + z) minus alphaut. A reduction in the unemployment rate will cause
the sum of the employed and unemployed downward sloping. an increase in the inflation rate over time.
